Trust receives extra time to allocate GST exemption after ETIP

Plain-English summary

A decedent created a grantor retained income trust that was subject to an estate tax inclusion period (ETIP). The tax adviser correctly did not allocate generation-skipping transfer exemption when the trust was funded, but later failed to advise the decedent and trustees to make the allocation when the ETIP ended. The IRS found that the requirements for discretionary relief under Treas. Reg. § 301.9100-3 were satisfied. It granted 120 days to allocate the decedent's GST exemption to the trust, effective as of the ETIP's closing date, with the allocation reported on a Form 709 for that year.

Ruling snapshot

• Question: May the decedent's GST exemption be allocated after the deadline to the trust property valued when the ETIP ended?
• Outcome: Approved, with 120 days to make an allocation effective at the end of the ETIP
• Key authorities: IRC §§ 2631, 2632, and 2642(f) and (g); Treas. Reg. §§ 301.9100-1 and 301.9100-3; Notice 2001-50

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201447026 Third Party Communication: None
Release Date: 11/21/2014 Date of Communication: Not Applicable
Index Number: 2642.00-00, 9100.00-00
Person To Contact:

---------------, ID No. ----------------

Telephone Number:

--------------------

Refer Reply To:
CC:PSI:04
PLR-101522-14
Date:
July 16, 2014

Re: ------------------------------------

LEGEND

Date 1 = -----------------
Year 1 = ------
Decedent = -----------------------
Trust = --------------------------------------------------------------------------------

Date 2 = --------------------
Son = --------------------------
Daughter = ----------------
Trust 1 = ------------------------------------------------------------
Trust 2 = ---------------------------------------------------------------------------------

Year 2 = ------
Law Firm = ----------------------------
Attorney = ---------------------
Date 3 = --------------------

Dear ------ ------------------------------:

PLR-101522-14 2

This letter responds to your submission dated December 26, 2013, and
subsequent correspondence, requesting an extension of time pursuant to § 301.9100-3
of the Procedure and Administration Regulations to allocate generation-skipping
transfer (GST) exemption to Trust.

FACTS

The facts and representations submitted are as follows.

On Date 1 in Year 1, Decedent established and funded Trust, a grantor retained
income trust, under which Decedent’s retained interest would terminate on Date 2. The
co-trustees of Trust were Son and Daughter. Decedent survived the term. The estate
tax inclusion period (ETIP) with respect to Decedent’s transfer to Trust closed for GST
purposes on Date 2 in Year 2, the year that Decedent’s retained interest in Trust
terminated. At the close of the ETIP, Trust was divided into Trust 1 and Trust 2. Each
trust has GST potential. Date 2 is a date prior to December 31, 2000.

In Year 1, at the time Trust was drafted, executed and funded, Son was an
attorney and practiced in tax, estate, and business planning at Law Firm. Attorney
drafted Trust and prepared and filed Decedent’s Year 1 Form 709, United States Gift
(and Generation-Skipping Transfer) Tax Return. The Year 1 Form 709 reported the
transfer to Trust. Attorney did not allocate Decedent’s GST exemption to the transfer in
Year 1 because Trust was subject to an ETIP.

Son was the sole advisor to Decedent and Daughter regarding the proper
management of Trust. Son failed to advise Decedent and Daughter to allocate
Decedent’s GST exemption at the end of the ETIP when Trust terminated in Year 2.
Decedent’s available GST exemption had not been allocated to Trust at the end of the
ETIP in Year 2. Decedent and Son died on Date 3.

You have requested an extension of time under § 2642(g) and § 301.9100-3 to
allocate Decedent’s GST exemption to the value of the trust property in Trust on the
date of the expiration of the ETIP.

LAW AND ANALYSIS

Section 2601 imposes a tax on every GST. A GST is defined under § 2611(a) as
(1) a taxable distribution, (2) a taxable termination, and (3) a direct skip.

Section 2602 provides that the amount of the tax imposed by § 2601 is the
taxable amount multiplied by the applicable rate. Section 2641(a) defines the applicable
rate as the product of the maximum federal estate tax rate and the inclusion ratio with
respect to the transfer. Under § 2642(a), the inclusion ratio with respect to any property

PLR-101522-14 3

transferred in a GST is the excess (if any) of one over the applicable fraction. The
applicable fraction, as defined in § 2642(a)(2), is a fraction, the numerator of which is
the amount of the GST exemption under § 2631 allocated to the trust, and the
denominator of which is the value of the property transferred to the trust.

Section 2631(a), as effective in the year at issue, provided that, for purposes of
determining the inclusion ratio, every individual shall be allowed a GST exemption of
$1,000,000 (adjusted for inflation under § 2631(c)) which may be allocated by such
individual (or his executor) to any property with respect to which such individual is the
transferor. Section 2631(b) provides that any allocation under § 2631(a), once made,
shall be irrevocable.

Section 2632(a)(1) provides that any allocation by an individual of his or her GST
exemption under § 2631(a) may be made at any time on or before the date prescribed
for filing the estate tax return for such individual's estate (determined with regard to
extensions), regardless of whether such a return is required to be filed.

Section 2642(f)(1) provides that, for purposes of determining the inclusion ratio, if
an individual makes an inter vivos transfer of property, and the value of such property
would be includible in the gross estate of such individual under chapter 11 if such
individual died immediately after making such transfer (other than by reason of § 2035),
any allocation of GST exemption to such property shall not be made before the close of
the estate tax inclusion period (ETIP). Section 2642(f)(2)(B) provides, in relevant part,
that the value of such property shall be its value as of the close of the estate tax
inclusion period.

Section 2642(g)(1)(A) provides that the Secretary will by regulation prescribe
such circumstances and procedures under which extensions of time will be granted to
make an allocation of GST exemption described in § 2642(b)(1) or (2) and an election
under § 2632(b)(3) or (c)(5). Such regulations shall include procedures for requesting
comparable relief with respect to transfers made before the date of the enactment of
§ 2642(g)(1)(A), which was enacted into law on June 7, 2001.

Section 2642(g)(1)(B) provides that in determining whether to grant relief, the
Secretary will take into account all relevant circumstances, including evidence of intent
contained in the trust instrument or instrument of transfer and such other factors as the
Secretary deems relevant. For purposes of determining whether to grant relief, the time
for making the allocation (or election) will be treated as if not expressly prescribed by
statute.

Notice 2001-50, 2001-2 C.B. 189, provides that under § 2642(g)(1)(B), the time
for allocating the GST exemption to lifetime transfers and transfers at death, the time for
electing out of the deemed allocation rules, and the time for electing to treat any trust as

PLR-101522-14 4

a GST trust are to be treated as if not expressly prescribed by statute. The Notice
further provides that taxpayers may seek an extension of time to make an allocation
described in § 2642(b)(1) or (b)(2) or an election described in § 2632(b)(3) or (c)(5)
under the provisions of § 301.9100-3.

Section 301.9100-1(c) provides that the Commissioner has discretion to grant a
reasonable extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3
to make a regulatory election, or a statutory election (but no more than six months
except in the case of a taxpayer who is abroad), under all subtitles of the Code except
subtitles E, G, H, and I.

Section 301.9100-3 provides the standards used to determine whether to grant
an extension of time to make an election whose due date is prescribed by a regulation
(and not expressly provided by statute). Under § 301.9100-1(b), a regulatory election
includes an election whose due date is prescribed by a notice published in the Internal
Revenue Bulletin. In accordance with § 2642(g)(1)(B) and Notice 2001-50, taxpayers
may seek an extension of time to make an allocation described in § 2642(b)(1) or (b)(2)
or an election described in § 2632(b)(3) or (c)(5) under the provisions of § 301.9100-3.

Requests for relief under § 301.9100-3 will be granted when the taxpayer
provides the evidence to establish to the satisfaction of the Commissioner that the
taxpayer acted reasonably and in good faith, and that granting relief will not prejudice
the interests of the government.

Section 301.9100-3(b)(1)(v) provides that a taxpayer is deemed to have acted
reasonably and in good faith if the taxpayer reasonably relied on a qualified tax
professional, including a tax professional employed by the taxpayer, and the tax
professional failed to make, or advise the taxpayer to make, the election.

Based on the facts submitted and the representations made, we conclude that
the requirements of § 301.9100-3 have been satisfied. Accordingly, an extension of
time of 120 days from the date of this letter is granted to allocate Decedent's GST
exemption to the transfer to Trust. The allocation will be effective as of the end of the
ETIP on Date 2. The allocation should be made on Form 709 for Year 2 and filed with
the Internal Revenue Service Center, Cincinnati, Ohio 45999. A copy of this letter
should be attached to each Form 709.

Except as expressly provided herein, no opinion is expressed or implied
concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of
the Code provides that it may not be used or cited as precedent.

PLR-101522-14 5

In accordance with the Power of Attorney on file with this office, a copy of this
letter is being sent to your authorized representative.

The rulings contained in this letter are based upon information and
representations submitted by the taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party. While this office has not verified any of the
material submitted in support of the request for rulings, it is subject to verification on
examination.

Sincerely,

Lorraine E. Gardner
Senior Counsel, Branch 4
Office of Associate Chief Counsel
(Passthroughs & Special Industries)

Enclosures (2)